The Green Sheet Online Edition

October 25, 2010 • Issue 10:10:02

Street SmartsSM

Making VAR relationships work for you

By Ken MusanteEureka Payments LLC

The Holy Grail of merchant services is a niche where no one else can play - be it because of pricing, strategy, solution, knowledge or customer access - the niche where only you can provide services at a competitive rate.

We can all think of companies that rule a niche. Merchant Warehouse's BIN routing product, Planet Payment or Payvision's multicurrency offering are just a few product niches that have insulated these processors from competition.

How about Elavon's integration work with third-party value-added resellers (VARs)? Ever try to move a merchant that was integrated with Intuit Inc.'s QuickBooks? Many VARs provide that same differentiation, such as Micros, which charges a premium for its product, while others, like USA ePay and eProcessing Network differentiate by being the low price leaders.

Differentiating through VARs, however, raises one big issue: Success criteria for VARs are different from yours. By their nature, VARs want to partner with as many providers as possible, thereby increasing the competition in your niche. Your goal is to bring on merchants profitably and directly.

VAR-sighted

But what if you could develop an exclusive relationship with a VAR? Would the VAR then become an extension of your company? How could you do so in a manner that properly compensates the VAR while maintaining your niche?

To determine this, I posted the following on GS Online's MLS Forum:

"We need VARs. We need them to certify to our processor, comply with network changes and mandates and cater to merchant requests. Many of us compensate VARs for referrals as well.

Some VARs see such compensation as a conflict and refuse it, while others will only steer business if they receive such compensation. How do you see VARs? Are they competitors or our allies? Is there a wholesale difference between VARs serving retail merchants versus VARs serving card-not-present merchants?"

WWW.PAYMENTLOGISTICS.COM further framed the discussion, stating, "For the purposes of my post, I'll assume a VAR is not a traditional MLS or ISO, but rather is any entity that adds a piece of technology to the sale, which the merchant purchases and then uses in conjunction with electronic payment processing services.

That makes a VAR a competitor to all service providers who they are not compatible with, or do not endorse, and an ally to all service providers who they are compatible with and they do endorse."

WWW.PAYMENTLOGISTICS.COM related talk in the industry several years ago about margin compression and how it is the reality for most maturing industries. However, a handful of payment companies realized margin compression could be reversed by creating a "technology barrier" that eliminated or greatly reduced competition for their merchants, while adding value at the same time.

"In my opinion, Mercury Payment Systems and a few others have been very successful with this model," he wrote. "For everyone not doing this, not only do they have to continue to worry about margin compression, but now they have an ever-shrinking pool of merchants they can market their services to."

WWW.PAYMENTLOGISTICS.COM likened margin compression to standing on a stack of gold coins arranged in columns. Every month the top layer of coins, as well as the outermost columns, are removed.

Assuming each column of coins represents a merchant, and the height of the stack represents the ISO's margin on that merchant, losing the top layer illustrates margin compression, and losing the outermost columns represents a shrinking pool of merchants you can market to due to technology barriers.

"That's the reality for many service providers in this industry, and it's getting harder for them to replace the coins they are losing," he wrote. "But today the industry has and continues to react to those technology barriers by competing in the technology barrier-building process."

WWW.PAYMENTLOGISTICS.COM went on to say that more companies have in-house payment gateways and in-house technology offerings which add value for VARs and, ultimately, their merchants. "When you are successful in turning a VAR into an ally, you often have been successful in turning that VAR into a competitor for someone else," he said.

Assets and liabilities

I love the gold coin analogy. It illustrates how VARs can insulate or isolate themselves from our competition. CLEARENT expanded on the above comments, "I agree," he wrote. "Our industry has a habit of hijacking acronyms. VAR, in its true definition, was an asset to the ISO and ISA. It was an added tool to the toolbox.

"Today, it means multiple things, and without speaking about specific VARs, it isn't possible to generalize."

CLEARENT offered an example of how some VARs recognized an opportunity in partnering with processors and reselling processing, thereby becoming direct competitors to ISOs and competing on price.

"Sometimes we will have been selling VARs and find out that they had entered a partnership after we have sold them to a merchant of ours," CLEARENT said. "This results in a fear of selling any VARs, or setting some boundaries on selling them."

The moral of CLEARENT's post is clear. "Investigate the VAR you choose as a partner, ask their intent regarding partnerships, and decide on whether they become a tool or not," he wrote.

Take it or leave it

While CLEARENT makes valid points, I want to further explore his summary. He proposes a simple solution. However, the playing field is dynamic, and while your partner VAR and your own priorities may currently be aligned, that could change. The ownership structure of the VAR could change or the competitive playing field could change or your own capabilities could change.

The result is that the VAR (or you) could choose a path that no longer allows for the tight relationship that you currently enjoy. From my perspective, that is not a problem or even a reason to get angry with a partner VAR. It's simply a business evolution.

Recognize this when structuring your relationship with your VAR, and establish parameters that allow payouts to continue after the expiration of the agreement, and require merchants to be maintained on their existing platforms in perpetuity.

This will ensure the work you have done continues to pay dividends to both parties. And while you can remain on friendly terms with the VAR, you may not always have as tight of a relationship as you once did - and that is OK.

Friend or foe

JGARZA provided insight and a prediction for the future. "[T]he VAR market and increased need for technology has created an interesting dilemma," he wrote. "From my personal opinion, in the next seven to 10 years, VARs will be the front-runner, not the IC/ISO, or even a bank, in acquiring a merchant account.

"With the ever-growing mobile space, cloud computing and business management systems, going to the bank and opening an account is going to be second on the list.

When an IC/ISO approaches a prospective merchant, it's highly probable that the merchant will already have their system or solution up and running and the IC/ISO will have minimal chances on new accounts."

JGARZA mentioned the emergence of Intuit QuickBooks, Blackbaud, PayPal, with services not dreamed of 10 years ago. He said, "Things are going to get interesting, and if I had to answer if a VAR is an ally or competitor, if you leverage a solution or expertise the VAR can't support, you become an immediate ally.

If your business model is one of high-priced terminal sales, free terminals, leases and no value, buckle up because more competitors are coming!"

BANKCARDREP1 is no fan of partnering with VARs. His blunt analysis is that VARs are competitors. "Every relationship I ever had with a VAR ended with them eating my lunch," he wrote. "Become one, or compete with one."

RBELCHER is in complete agreement when he said, "Competitor, they always pretend to have your best interest at heart, but never ever trust the VAR. There is one way to tell if they are lying: look to see if their mouth is moving."

WWW.PAYMENTLOGISTICS.COM believes to maintain a relationship with a VAR, you must provide them something unique: "It's all about adding value for the VAR, whether through technology, creativity, support or a combination thereof.

A relationship based solely on commissions is ripe for competitors or for the VAR to cut out the middleman and become a direct competitor.

"Just like any other business, VARs have problems and issues they struggle with, too. Show them how working with you resolves their problems and addresses their issues, and you've gained what will hopefully be a lifetime ally."

According to WWW.PAYMENTLOGISTICS.COM, the trick is to differentiate yourself from the competition when in pursuit of VARs. "Our company has been able to do this with technology and creativity," he said. "Not every solution has to be high-tech either. Thinking outside of the box is a great way to address a VAR's needs in a sustainable and manageable fashion.

"Sharing in the upside is the easy part. Adding value to the VAR's business in ways others can't is the hard part, and if you're an MLS in today's evolving industry, it takes a partner who has the in-house resources, innovation and desire to help you deliver.

And for those MLSs that want to work on these types of relationships, it only takes one good one to change your life." This is a great point and encourages us to treat VARs like we would our merchant customers.

CARDPLAYER's comments affirm it is OK to have a non-monogamous relationship with a VAR; it's called "coopetition." "Sometimes you cooperate and benefit from mutual referrals; sometimes you compete for the business with your referral partner," he said. "VARs are in the same pickle. It's all in how you play the game."

I agree. We should not put all our eggs in a VAR's basket. We should strategically work with VARs and understand that we are separate companies.

At some point, either we or the VAR may go a different direction, and we should be able to remain on friendly terms and appreciate the history we created.

To VAR or not to VAR

I'll give the last word to STEVE NORELL and NWBC. STEVE NORELL said, "Whether or not you want to admit it, more and more VARs each day are getting into competing with the MLS business.

They are almost required to do so because they are all looking for a place to increase monthly revenue, and that place is residual income.

"Whether they get it from the merchant directly or from the ISO/MLS is irrelevant; they need it and they are going after it. Today's market condition is making it necessary for all types of businesses in our industry to look for income anywhere they can get it, even if it goes against their original model."

NWBC said, "[A]s several of us on this forum can tell you because we are both the VAR and the processor; the tide is turning to the VAR. I've said for a couple of years now that, if you didn't have a relationship within x years (currently x = 3), then you would be relegating yourself to the fringes of the processing world."

NWBC sees VARs pushing hybrid POS systems in the future. "The VARs love the idea of hybrids as that will be more difficult for the ISO community to counter," NWBC said.

"It won't be all that long from now that if you can't offer the VAR something of real value, they won't need you at all. You'll be a dinosaur, and we all remember what happened to them, don't we?"
I want to give a shout out to Joe Garza of Moneris Solutions for the topic suggestion. Thank you, send more.